# NBFC Responsible Business Conduct Directions for MSME Loans

> What RBI's 2025 NBFC Responsible Business Conduct Directions require at sanction and disbursal on MSME and mid corporate loans: KFS, charges, prepayment.

Source page: https://creditbrief.in/posts/nbfc-responsible-business-conduct-directions
Published: 2026-11-06
Publisher: CreditBrief

The Reserve Bank of India (Non-Banking Financial Companies – Responsible Business Conduct) Directions, 2025 set the conduct rules an NBFC must follow when it lends. For an MSME or mid corporate credit file, these Directions decide what the sanction letter and loan agreement must disclose, what can be charged later, and how penalties and prepayment charges work. The Fair Practices Code and penal charges rules reach both products. The Key Facts Statement (KFS) rules name retail and MSME term loans, and the prepayment bar turns on the borrower, the rate type, the lender's layer and the loan size.

This piece covers only NBFCs within these Directions, issued on November 28, 2025 (DOR.MCS.REC.No.281/01-01-039/2025-26) and read here as updated on July 1, 2026.

## Why do the NBFC Responsible Business Conduct Directions matter for underwriters?

The NBFC Responsible Business Conduct Directions, 2025 turn the terms in a credit note into borrower-facing commitments. Under para 29(5), a fee left out of the KFS cannot be charged during the loan term without the borrower's explicit consent. Under para 34(8), an undisclosed prepayment charge cannot be charged at all.

Pricing has to be explainable. Para 22 requires the rate, the approach to risk gradation and the rationale for charging borrower categories differently to be disclosed in the application form and communicated explicitly in the sanction letter.

Covenants also need care. Para 30(1) treats a penalty for non-compliance with material terms as a penal charge, not as penal interest added to the rate, and para 30(2) bars any additional component to the rate of interest. Check any rate step-up linked to a covenant breach with compliance.

## How do the NBFC Responsible Business Conduct Directions work?

The NBFC Responsible Business Conduct Directions, 2025 apply across all layers to NBFC-D (deposit-taking), NBFC-ICC (investment and credit company), NBFC-Factor, NBFC-MFI (microfinance institution), NBFC-IFC (infrastructure finance company), IDF-NBFC (infrastructure debt fund) and housing finance companies, unless a provision says otherwise. NBFC-P2P is covered only by paras 98 to 100. Para 5 excludes mortgage guarantee companies, core investment companies, account aggregators, standalone primary dealers, non-operating financial holding companies and NBFCs with no customer interface.

The Board sits at the top. Paras 7 and 8 require Board-approved policies and periodic review of Fair Practices Code compliance and of the grievance mechanism. Disputes over decisions by functionaries must be heard and disposed of at least at the next higher level.

| Provision | Paras | MSME term loan | Mid corporate term loan |
|---|---|---|---|
| Fair Practices Code | 9 to 28 | Applies | Applies |
| Key Facts Statement | 29 | Applies to loans sanctioned on or after October 1, 2024, including fresh loans to existing customers | Not named, unless the borrower is an MSME |
| Penal charges | 30 | Applies, subject to the listed exclusions | Applies, subject to the listed exclusions such as trade credits and structured obligations |
| Floating rate reset | 31 and 32 | Section heading and para 31 refer to personal loans, but para 32 extends to all equated instalment-based loans. Ask compliance | Same point. Ask compliance if the loan is repaid in equated instalments |
| Prepayment charges | 34 | Depends on borrower size, rate type, layer and amount | Per NBFC policy, on the amount prepaid for a term loan, unless the borrower falls within para 34(2) |

### Sanction and documentation under the Directions

Para 13 of the Directions requires the sanctioned amount and terms, including the annualised rate and how it is applied, to be conveyed in writing. The NBFC keeps the borrower's acceptance on record, and late repayment penalties must appear in bold in the loan agreement.

Para 14 requires a copy of the agreement and each enclosure quoted in it to go to every borrower at sanction or disbursement. Withholding them is described as an unfair practice.

### What must a Key Facts Statement contain?

The KFS is a standardised summary of key loan terms, in the format at Annex I of the Directions. Para 29 applies to new retail and MSME term loans sanctioned on or after October 1, 2024, and sets these requirements:

- A language the borrower understands, an explanation of the contents, and an acknowledgement that the borrower has understood them.
- A unique proposal number and a validity period of at least three working days for tenors of seven days or more, or one working day for shorter tenors. The NBFC is bound by the terms if the borrower agrees within that period.
- A computation sheet for the Annual Percentage Rate (APR), the annual cost of credit including interest and all other charges, plus an amortisation schedule.
- Third-party charges recovered on actual basis, such as insurance and legal charges, included in the APR and disclosed separately, with receipts given to the borrower for each payment within a reasonable time.
- The KFS exhibited as a summary box in the loan agreement.

The RBI illustration in para 29 computes APR on the net disbursed amount, using an internal rate of return (IRR) approach and the reducing balance method. Where a charge cannot be determined before sanction, the illustration allows an upper ceiling to be shown.

### How do penal charges work for NBFCs?

Para 30 of the Directions applies to fresh loans availed from April 1, 2024, with existing loans switching over from June 30, 2024. Penal charges for default must be reasonable, levied only on the amount under default and set under a Board-approved policy. Penal charges cannot be capitalised, and fresh penal charges cannot be levied on earlier unpaid penal charges. Interest on unpaid interest may continue at the contracted rate, not a penal rate.

Para 30 excludes credit cards, external commercial borrowings, trade credits, structured obligations and other foreign currency loans.

The structure can vary with loan amount within a product category, but must be uniform irrespective of the borrower's constitution. RBI prescribes no cap, and states that these charges are not a revenue enhancement tool. Amounts and definitions of material terms vary by institution.

The quantum and reason must be disclosed upfront in the loan agreement and in the Most Important Terms and Conditions or KFS, as applicable. A reference to a schedule on the website is not enough. Under para 30(7), reminders for non-compliance must state the applicable penal charges, and any levy must be communicated with the reason.

### Do floating rate reset rules reach business loans?

Floating rate reset rules in Section D of the Directions may reach a business term loan repaid in equated instalments. The Section D heading and para 31 refer to personal loans, with effect from January 1, 2024. Para 32 then applies these instructions, with necessary changes, to all equated instalment-based loans of different periodicities, whether linked to an external or an internal benchmark, and says para 31 does not apply to other types of loans. Ask compliance how para 32 applies to the product.

Where para 31 applies, the main requirements are:

- At sanction, communicate the possible impact of a benchmark change on the EMI, the tenor or both.
- Communicate any increase in the EMI or tenor immediately.
- Give the borrower the choice of a higher EMI, a longer tenor or a combination, and the choice to prepay in part or in full. Prepayment charges remain subject to extant instructions.
- Disclose switching and incidental charges in the sanction letter.
- Ensure a longer tenor does not cause negative amortisation.
- Share a statement at the end of each quarter showing principal and interest recovered, the EMI amount, EMIs left and the annualised rate or APR.

### When can an NBFC levy prepayment charges?

Para 34 of the Directions covers term loans and demand loans sanctioned or renewed on or after January 1, 2026. Para 34(2) treats floating rate loans for business purposes to individuals and Micro and Small Enterprises (MSEs) as follows:

| NBFC layer | Prepayment charge |
|---|---|
| Upper Layer | None |
| Middle Layer | None if the sanctioned amount or limit is up to ₹50 lakh; otherwise per NBFC policy |
| Other NBFCs | Per NBFC policy |

The bar applies whatever the source of funds and with no minimum lock-in. Dual rate loans are tested on whether the loan is floating at the time of prepayment.

For other cases where a charge is allowed, a term loan charge must be based on the amount prepaid. On cash credit or overdraft closed before the due date, the base cannot exceed the sanctioned limit. Under para 34(6), no charge applies on cash credit or overdraft where the borrower gives timely notice of non-renewal and the facility closes on the due date. Nothing can be charged when prepayment happens at the NBFC's instance, and fees waived earlier cannot be reintroduced at prepayment.

### What do the Directions require after disbursal?

Para 15 of the Directions requires notice of changes to the disbursement schedule, rates and charges, and rate and charge changes can only be prospective. The loan agreement must carry a condition saying so. Para 16 requires recall or acceleration to follow the agreement. Para 18 tells the NBFC not to interfere in the borrower's affairs except for purposes in the agreement, unless information not earlier disclosed has been noticed.

Para 17 requires securities to be released on repayment of all dues, subject to any legitimate lien. If the NBFC uses a set-off right, it must give notice with full particulars of the remaining claims. Para 19 gives the NBFC 21 days from receipt to convey its consent or objection to a request to transfer a borrowal account.

## India specifics in the NBFC Responsible Business Conduct Directions

The NBFC Responsible Business Conduct Directions, 2025 carry these India-specific points:

- **Language:** para 10 requires borrower communications in the vernacular or a language the borrower understands, and para 29(1) applies the same test to the KFS. A KFS in English alone does not meet the test for a borrower who does not understand it.
- **Borrower definition:** the para 34(2) prepayment bar uses the MSMED Act, 2006 definition of Micro and Small Enterprises. Para 29 refers more widely to MSME term loans.
- **Interest rates:** para 25 says RBI does not regulate rates, but rates beyond a certain level may be seen as excessive. Para 22 requires a Board-adopted model covering cost of funds, margin and risk premium, and para 23 requires rates and the gradation approach to be on the website or in relevant newspapers.
- **GST:** para 30 tells NBFCs to follow Central Board of Indirect Taxes and Customs instructions on GST on penal charges.
- **Disability:** para 28 bars discrimination against physically or visually challenged applicants on grounds of disability.

## Worked example, made-up numbers

A Middle Layer NBFC sanctions a floating rate term loan to a small enterprise, for business purposes, on a date after January 1, 2026. Fees are deducted at disbursal.

| KFS item | Amount |
|---|---|
| Sanctioned amount | ₹30,00,000 |
| Tenor and instalments | 36 monthly EMIs of ₹1,02,533 |
| Interest rate at sanction | 14% |
| Total interest at that rate | ₹6,91,188 |
| Processing fee payable to the NBFC | ₹45,000 |
| Legal and insurance charges routed through the NBFC | ₹15,000 |
| Net disbursed amount | ₹29,40,000 |
| Total repayable | ₹36,91,188 |
| APR | About 15.43% |

The APR here is the monthly IRR on the net disbursed ₹29,40,000, multiplied by 12. The stated rate is 14%, but the APR is about 15.43% because the ₹45,000 processing fee and the ₹15,000 third-party charges both count. If the ₹15,000 were left out of the APR, the computation sheet would be wrong.

**Missed EMI.** The agreement sets a penal charge of 2% on the amount in default. One missed EMI gives ₹2,051, charged on ₹1,02,533 and not on the outstanding loan. No interest runs on the ₹2,051. Interest on the unpaid EMI at the contracted 14% for one month is about ₹1,196.

**Prepayment.** The borrower prepays ₹10,00,000. The charge depends on the case:

| Case | Charge |
|---|---|
| Middle Layer, ₹30,00,000 sanctioned, floating | None |
| Upper Layer, ₹30,00,000 sanctioned, floating | None |
| Middle Layer, ₹70,00,000 sanctioned, floating | Per policy. At an assumed 2%, ₹20,000 on the amount prepaid |
| Middle Layer, ₹30,00,000 sanctioned, fixed | Per policy, if disclosed. At an assumed 2%, ₹20,000 on the amount prepaid |

The 2% rates are illustrations only and are not benchmarks.

## Pitfalls under the NBFC Responsible Business Conduct Directions

These are the common ways to misread the NBFC Responsible Business Conduct Directions, 2025 on a credit file:

- **Treating MSME and MSE as the same.** A medium enterprise is within the para 29 KFS wording, but a medium enterprise that is not an individual borrower is outside the para 34(2) bar. Record the borrower's classification on the file.
- **Assuming every mid corporate loan is outside the KFS.** A mid corporate label does not settle it. If the borrower is an MSME, para 29 can apply to a term loan.
- **Disclosing penal charges by website link.** Para 30(6) says this is not enough.
- **Adding a fee after the KFS is issued.** Under para 29(5), a charge that is not in the KFS needs the borrower's explicit consent.
- **Assuming a sanction letter alone covers prepayment.** Para 34(8) requires disclosure in the sanction letter and the loan agreement, and in the KFS where one is required.
- **Reading Section D as personal-loan only.** Para 32 extends the reset instructions to all equated instalment-based loans, so a business term loan repaid in equated instalments may be caught. Ask compliance how para 32 applies.
- **Using Section F on business loans by default.** Section F, with its 30-day document release timeline and ₹5,000 per day compensation, is headed for personal loans, and para 6(10) defines that term for Sections D and F by reference to RBI's XBRL returns. Check how the product is classified. For other loans, start with para 17.
- **Missing the renewal trigger.** Para 34 applies to loans renewed on or after January 1, 2026, so a renewal can change the prepayment position.
- **Skipping product-specific clauses.** Vehicle loans need the repossession terms in para 26, including the notice period and a final chance to repay before sale or auction.

## Checklist for NBFC Responsible Business Conduct Directions compliance

Use this checklist on an MSME or mid corporate file under the NBFC Responsible Business Conduct Directions, 2025:

- Confirm the NBFC type and layer, and that the Directions apply.
- Record the borrower's MSME or MSE status and the loan's purpose and rate type.
- Confirm whether a KFS is required. If so, check the proposal number, validity period, APR sheet, amortisation schedule and acknowledgement.
- Match every fee in the credit note to the KFS, sanction letter and agreement.
- Show third-party charges separately and include them in the APR.
- State the annualised rate and how it is applied, and communicate the gradation rationale in the sanction letter.
- Put late repayment penalties in bold in the agreement, and state the quantum and reason for penal charges.
- Check that no covenant consequence works as added interest.
- For a floating rate loan repaid in equated instalments, ask compliance how para 32 applies.
- State whether prepayment charges apply, and on what base.
- Include the condition that rate and charge changes are prospective only.
- Check that recall and acceleration terms are clear in the agreement.
- Use a language the borrower understands, and keep the acceptance on record.
- Give the borrower the agreement and every enclosure quoted in it.

## Sources

- [Reserve Bank of India (Non-Banking Financial Companies – Responsible Business Conduct) Directions, 2025](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12942), rbi.org.in, accessed 2026-11-06

Indicative only. Verify against your institution's policy.